Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5053295 | Economic Modelling | 2016 | 12 Pages |
Abstract
As the price of the underlying asset changes over time, delta of the option changes and a gamma hedge is required along with delta hedge to reduce risk. This paper develops an improved framework to compute delta and gamma values with the average of a range of underlying prices rather than at the conventional fixed 'one point'. We find that models with time-varying volatility price options satisfactorily, and perform remarkably well in combination with the delta and delta-gamma approximations. Significant improvements are achieved for the GARCH model followed by stochastic volatility models. The new approach can ensure significant improvement in modelling option prices leading to better risk-management decision-making.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Sharif Mozumder, Michael Dempsey, M. Humayun Kabir, Taufiq Choudhry,